Who owns small business?

More from FSB

Help wanted for HR firm A CEO and rodeo queen King of the mountain bike

Current Issue

(FSB Magazine) -- The Senate, convening today for its brief December session, has a lot on its plate - top priorities include a free trade deal with Peru, new fuel economy standards, and a bill to immunize phone companies from liability for wiretapping. But Sen. John Kerry (D-Mass.), chairman of the Senate's small business committee, hopes to find time for a floor vote on the Small Business Venture Capital Act, which would entitle VC-backed startups to apply for federal research and development grants.

This bill is the Senate version of a measure the House passed in September called the Small Business Investment Expansion Act. Kerry's version, cosponsored with Republican Olympia Snowe, is most notable for what it leaves out: The House bill included controversial language to broaden the definition of small business, and the Senate measure does not. If Kerry's bill passes in the next few weeks, then the government's definition of small business could hinge on how the two versions are reconciled by lawmakers.

To count as small under current law, a business must be "independently owned and operated" - which the SBA interprets as being majority-owned by individuals rather than by other businesses, such as venture capital partnerships. The current system restricts venture capitalists to minority stakes in small businesses.

As a result, firms with substantial VC backing often find themselves disqualified from the government's small business R&D grants, even if they have only a handful of employees.

That's why the venture capitalists have been pushing for change, and were among the leading backers of the House bill. The legislation would allow a firm that is majority-owned by a syndicate of venture capital investors to be counted as a small business. "Our argument is that just because a small company gets venture capital doesn't mean that it should be discriminated against," says Emily Mendel, VP for Strategic Affairs at the National Venture Capital Association.

The issue is particularly acute for startup biotech firms, whose high R&D costs make substantial venture backing indispensable.

But critics - including a congressional staffer familiar with the situation, who insisted on anonymity - warn that relaxing the standards for small business eligibility could harm small firms throughout the economy. If companies owned by outside investors can still count as small, then many large businesses will be tempted to set up "small" affiliates to compete for special government assistance. Existing policy makes it easier for small businesses to win government contracts, secure subsidized loans, and purchase certain kinds of insurance, among other benefits.

The problem of large businesses crowding under the small business tent isn't new, but critics warn that the Small Business Venture Capital Act could make it much worse. That's why the Bush administration, in a move that might seem surprising given its generally favorable view of big business, has come out against the House bill, as have several small business lobbying groups.

Even if the effort to redefine small business fails in this session, however, it won't go away. Venture capitalists are well connected and funded, and they have a good argument in the biotech field, where small businesses without much venture funding tend to be the also-rans. The real question is whether or not a narrower compromise, addressing the biotech issue without redefining small business everywhere, will prevail over the broader bill now pending in Congress.